Two of Britain’s best known retailers report results this week. It’s the tale of a clothes shop that gets its profits from food sales and a supermarket which is focusing more on its clothing and other non-grocery sales.
Marks & Spencer (first half results released November 8th 2016)
The long-awaited turnaround in the M&S clothing division is so far nowhere to be seen under new Chief Executive Steve Rowe. Marks’ had its biggest fall in clothing sales since the 2008 financial crisis at its three-month update in July. The size of the sales decline was as a result of efforts to wean customers off discount shopping. In essence sales were forgone in attempt to sure up future profits.
The strategy of moving toward less sales events is at odds with what is still perceived to be generally unappealing clothing, despite some good reviews for the Alexa Chung range. The ‘discount’ and ‘fast fashion’ chains of Primark, H&M and Zara are the industry success stories that M&S has struggled to replicate in recent years.
The wider clothing market has been soft all this year with the Next chief Lord Wolfson correctly forecasting it to “feel like walking up the down escalator” as consumers switch away from spending on “stuff” to “experience.” This trend could worsen if the much-hyped rise in retail prices because of the drop in the British pound forces customers into only shopping at the sales.
The M&S food division is still the gold standard in an era of supermarket price wars with discounters Aldi and Lidl.
M&S shares are near the top of a price range of 300p to 350p that has been in place for the last four months. A confident outlook for post Brexit-Britain could help usher a breakout but weak results appear more likely to see shares drift back into the range.
Source CMC Markets, 2/11/2016
Sainsbury’s (earnings released November 9th, 2016)
The early stages of a fight back from the Sainsbury’s, Tesco and WM Morrison against discounters Aldi and Lidl has created improved investor interest in supermarkets this year.
Still, Sainsbury’s shares are significantly lagging behind those of Tesco and Morrisons. Investors have questioned the logic behind the acquisition of catalogue retailer Argos. The Argos purchase has brought with it uncertainty, mainly because Argos has been losing ground to online competition- so a turnaround is far from guaranteed. What, so far, has been overlooked is the diversification it presents from a price-pressured grocery business.
Expected future price inflation should be a positive for margins in the sector, though overall sales will be pressured. But the protracted price war means there is little desire to be the first-mover on rising prices. Marmite-gate is a prime example of the kind of battles the supermarkets will be having with suppliers.
Sainsbury’s shares sit around 250p having just struck four month highs in recent days. There are high hopes, that risk being dashed, that Sainsbury will continue to see quarterly sales growth.
Source: CMC Markets, 2/11/2016
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